Strong Fannie, Freddie Results Set the Stage for Debate Over Their Future
Both companies benefited from rising home prices, and a resurgence in refinancings prompted by falling mortgage rates, which have come down from 2021 peaks seen in March.
Mortgage giants Fannie Mae and Freddie Mac posted strong earnings growth during the second quarter, with both companies bolstering their capital reserves and net worth to set the stage for the next phase of the debate over their future.
Fannie Mae’s $7.2 billion in second quarter net income represented a 44 percent increase from a year ago, while Freddie Mac boosted net income by 107 percent, to $3.7 billion.
Both companies benefited from rising home prices, and a resurgence in refinancings prompted by falling mortgage rates, which have come down from 2021 peaks seen in March as the Federal Reserve continues to boost its mortgage holdings by $40 billion a month.
Fannie Mae acquired $243.8 billion in refinanced single-family mortgages in April, May and June, compared to $129.5 billion in purchase loans. Freddie Mac provided financing for about 1 million single-family homes, more than 708,000 of which were refinance loans.
“In the second quarter, we provided critical support for the housing market, delivered a strong financial performance, and continued to manage our risks well,” Freddie Mac CEO Michael DeVito said in a statement. “I’m very proud that during the quarter, we continued to advance our mission by providing liquidity, stability, and affordability to the market and by helping families keep their homes during the pandemic.”
With business booming, both Fannie and Freddie were also able to boost their net worth. Fannie Mae’s net worth increased to $37.3 billion as of June 30, while Freddie Mac’s hit $22.4 billion.
Fannie and Freddie net worth, 2017-2021
After being placed into government conservatorship in 2008 as potential losses from the subprime mortgage meltdown mounted, Fannie and Freddie have long since repaid a $191 billion taxpayer bailout — plus interest.
The continued improvement in Fannie and Freddie’s financial health provides ammunition to both sides in the debate over their future. Many Republicans want to continue the Trump administration’s push to release the companies from government conservancy, and reprivatize them. The Congressional Budget Office last year analyzed several scenarios for recapitalizing Fannie and Freddie and returning them to private ownership as soon as 2023.
But Democrats are likely to put the brakes on any such move, with some calling for the government to use the mortgage giants to provide better access to home loans for borrowers with blemished credit.
Credit characteristics of mortgages acquired by Fannie Mae
During the pandemic, many lenders tightened their underwriting, approving fewer loans to borrowers with lower credit scores. In 2018, 11.2 percent of single-family mortgages backed by Fannie Mae in 2018 were taken out by borrowers with FICO scores of less than 680.
Last year, that group of borrowers accounted for only 4 percent of loans. The weighted average FICO score on loans backed by Fannie Mae increased from 743 to 760 over the same period.
A June Supreme Court ruling gave the Biden administration more control over Fannie and Freddie’s regulator, the Federal Housing Finance Agency. The Biden administration replaced FHFA director Mark Calabria, a Trump appointee, with a new acting director, Sandra Thompson, who promptly ordered Fannie and Freddie to eliminate a 50-basis point refinancing fee.
The fee, which amounted to about $1,400 for a borrower refinancing a typical $280,240 mortgage, was intended to help the mortgage giants cover billions in anticipated pandemic losses.
In coming months, loan servicers are bracing for more than 1 million homeowners to lose protections provided by COVID relief forbearance programs. But most borrowers with Fannie and Freddie loans having already exited forbearance, the FHFA has determined the fee is no longer needed.
“The COVID-19 pandemic financially exacerbated America’s affordable housing crisis. Eliminating the [refinancing fee] will help families take advantage of the low-rate environment to save more money,” Thompson said in announcing the fee’s demise, effective Aug. 1.
The Urban Institute’s Michael Stegman recently pointed out that although another 10-basis point fee is set to expire Oct. 1, the FHFA could just let Fannie and Freddie keep collecting it — and use the roughly $4.5 billion in annual proceeds to further the Biden administration’s goals to provide more affordable housing and credit to underserved markets.
Erika Poethig, a special assistant to President Biden for housing and urban policy, told Politico that in “the coming months and years ahead, we look forward to working with FHFA leadership to use the levers of housing finance to address the racial wealth gap, expand housing supply and ensure housing affordability.”
The National Association of Realtors and other real estate industry groups have advocated that the government continue to play some kind of role in mortgage markets. NAR, for example, has proposed replacing Fannie and Freddie with a new private entity that’s regulated like a public utility.
Single-family mortgage-related securities
Fannie and Freddie’s future is of vital interest to real estate, since the vast majority of mortgages are packaged up into mortgage-backed securities (MBS) and sold to investors.
Together, Fannie and Freddie stood behind 74 percent of second quarter MBS issuances. That compares to 23 percent market share for Ginnie Mae, which guarantees principal and interest payments to investors who buy FHA, VA and USDA loans.